Spotify's Stock Listing Is a String of Question Marks

This is a dangerous sentence to write as a columnist who's supposed to have the answers, but here goes: No one knows for sure how Spotify's not-IPO will fare on Tuesday.

We've beenwriting for many monthsabout Spotify and its relatively novel method of becoming a public company by declaring its shares available to buy and sell freely to all comers. My inbox has filled up for weeks with offers of "experts" to opine about Spotify or its unusual stock listing. And yet, there are absolutely essential details about Spotify's not-IPO that people outside the company don't and can't confidently predict. And in moments of honesty, the people closest to the company would have to admit this, too.

For starters, no one really knows at what price Spotify shares will change hands once the company makes its stock market debut. This is kind of true in all new stock listings,
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but it's especially true in Spotify's case. In the first two weeks of March, existing Spotify stockholders sold about 5 million shares at prices ranging from about $49 to $132 each, according to a Spotify regulatory document.

Spotify's Canyon

The price of Spotify stock sales in private transactions has varied widely, and the gap widened in March

Source: Spotify disclosures

Notes: March stock sales are through March 14. Stock transactions exclude intercompany transfers Spotify made with Tencent or its affiliates.

Needless to say, that's a wide range that offers little insight into what price stockholders might take for their shares when Spotify flips the switch on Tuesday from a privately held company to a public one. This range of stock trading in March was even wider than share sales in January and February. And that big gap came from existing shareholders of the company, who presumably know more than the average man on the street about the company's inner workings or financial prospects. And yet there's broad divergence among them about the "right" price for Spotify shares.
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With this much disagreement about the value of a Spotify share, things could get very messy on Tuesday.

Spotify itself valued the company at $50.70 a share a little more than a year ago, and $120.50 a share in December, or a market valuation of about $22 billion. About half of the calculation of the recent share price, Spotify said, was based on the price in private stock sales. Although as noted above, recent private stock sales have produced wild variations in investors' value of Spotify shares.

Even hours before Spotify becomes a public company, the most basic question is unanswered: Will the unwashed stock market masses eyeball Spotify's (wildly divergent) previous stock trades and decide those are fair starting points for their own views of Spotify's value? Or will they vehemently disagree?

And no one knows the answer to the related question of how many shares of Spotify will be sold. In a conventional initial public offering, a company and its bankers decide ahead of time how many shares the company or existing stockholders will sell. This is all managed theatrics, but it's managed theatrics that are well understood in the financial world.

To the Moon

In Spotify's own valuations of its share price, the company's value more than doubled from early 2017 to the end of the year

Source: Spotify disclosures

At Spotify, none of that is happening. In theory, nearly all of the company's 178 million issued shares can be sold on Tuesday. If that happens and Spotify shares trade at the recent company-determined value of $120.50 a share, Spotify's not-IPO could amount to nearly $20 billion. That would be bigger than all but a handful of IPOs in history. (In the biggest IPO ever by value of shares sold, Alibaba Group sold about $25 billion in stock in 2014.)

I'm confident that not every Spotify stockholder will sell on Tuesday, but will it be closer to zero or to 178 million shares? That's a question mark. Spotify's advisers have been polling current stockholders to determine whether they're interested in selling shares now, and at what price. But if I were a Spotify stockholder, there's little incentive to tell bankers the truth. If there's a share price at which I want to sell, I'll just wait until the company is public and someone offers to buy at my dream price, and then I'll press "sell" on my E*Trade account.
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All these unknowns may not matter. Spotify has good and expensive professionals working on the not-IPO, and those folks can handle a lot of curveballs in a new stock listing.
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If everything goes smoothly, and Spotify emerges this week as a richly valued public company, it's a good bet that other relatively young tech companies will want their own not-IPOs.
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The second or third direct listing will be easier than the first. But being a pioneer comes with risks.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

In a conventional IPO, the company and its advisers settle on an initial share price that's based in part on indications from potential stock buyers about how many shares they might buy and at what price. This process is more art than science.

Spotify doesn't disclose the identity of the stockholders who sold shares in private transactions. If some of them initially bought Spotify shares at a few pennies each, they're likely more willing to sell at lower prices than stockholders who bought in at a higher valuation.

A counterpoint: Facebook's disastrous IPO was overseen by the smartest people in the world.

Arguably, Spotify's not-IPO was viable because the company has been fairly permissive about letting early investors and employees sell shares before the company went public. Some prominent young tech companies -- Uber, for example -- have tightly restricted private stock transactions.